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Computer Programs and Systems, Inc. (CPSI): Risks
While we believe CPSI has a solid position in its market with huge growth potential, we see several risks. One risk is consolidation among healthcare facilities. CFO David Dye downplayed this, as most of their clients are fiercely independent non-profit hospitals in rural communities. However, this is a risk and needs to be watched closely. Competition from the big players in the industry such as Cerner and Epic is a risk, but there currently is enough low-hanging fruit in the larger markets for these larger peers. Their systems also require IT staffs of 14 to 20, which CPSI’s target hospitals cannot afford. CPSI’s system requires an IT staff of two to three, and Cerner’s or Epic’s electronic health record systems are also three to four times more expensive than CPSI’s. In the short term, we are comfortable with this risk, but we are watching it. Healthcare legislation is the greatest unknown. Obviously, it is benefiting CPSI and its peers right now, but this could change and represents something of a tail risk if winds begin to blow in another direction.
CPSI is a solid business with plenty of growth potential. We are very impressed and confident in their management team. They have dealt with the missteps of the past in an appropriate manner. With their moat, especially the high amount of recurring revenue and their length of contracts, we look to them to continue to grow steadily for the foreseeable future. The near-term catalysts, nice dividend yield (4.10%), insider buying, strong moat, and relative value are all positives. In the short term, we are comfortable with the risks, notably competition and legislation risks. Valuation multiples are low versus CPSI’s own history and when compared to peers. Top-line growth is over 12%, which should be accelerated due to the short term catalysts, and seems very achievable. We set our price target at $62.00 and recommend buying under $52.00 for an appropriate margin of safety.
The Market Realist Take
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively referred to as the “Health Reform Laws.” This sweeping legislation implements changes to the healthcare and health insurance industries from 2010 through 2015, with the ultimate goal of requiring all US citizens and legal residents to have qualifying health insurance coverage by 2014 and making it available to them. The company anticipates that the Health Reform Laws will have little direct impact on its internal operation but may have a significant impact on the businesses of its hospital customers once fully in effect. It hasn’t been able to determine at this point whether the impact will be positive, negative, or neutral. However, it’s likely that the Health Reform Laws will affect hospitals differently depending on the populations they sere.
Rural and community hospitals typically serve higher uninsured populations than larger urban hospitals and rely more heavily on Medicare and Medicaid for reimbursement. It remains to be seen whether the increase in the insured populations for rural and community hospitals—as well as the increase in Medicare and Medicaid reimbursements under ARRA for hospitals that implement EHR technology—will be enough to offset the cuts in Medicare and Medicaid reimbursements contained in the Health Reform Laws.
CPSI believes that healthcare initiatives will continue during the foreseeable future. If adopted, some aspects of previously proposed reforms, such as further reductions in Medicare and Medicaid payments, could adversely affect the businesses of its customers and thereby harm its business. CPSI’s competitors include Cerner Corporation (CERN), Quality Systems Inc. (QSII), McKesson Corporation (MCK), Veeva Systems (VEEV), and Quadramed Corp (formerly QD, which was recently purchased and went private in June).
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